Russia’s Recession-Hit Economy to Struggle in 2016

Geopolitical instability, plunging commodity prices and a crashing ruble made 2015 an especially challenging year for Russia. Those headwinds are expected to persist through 2016 amid heightened economic and financial instability both domestically and internationally.

Recession-hit economy to struggle in 2016

Russia’s economy entered into recession in 2015 after posting only anemic growth in the previous two years. Russia’s gross domestic product (GDP) – the value of all goods and services produced in the economy – contracted 2.2% annually in Q1 2015. The economy plunged 4.6% annually in the second quarter and 4.1% in the third quarter.[1] According to the International Monetary Fund (IMF), the Russian economy likely contracted around 3.8% in all of 2015.[2]

Russia will struggle to escape recession in 2016, where it is forecast to contract by a further 0.6%, according to the IMF.[3] The Russian government is slightly more optimistic, forecasting growth of 0.7%.[4]

“Next year will not be simple,” Russia’s finance minister Anton Siluanov told Russian state television in a December 30 interview. “The latest predictions show that the price of our main exports could be lower than predicted.”[5]

Crude Prices

Obviously, Mr. Siluanov is referring mainly to crude and refined petroleum products, which together account for more than half of Russia’s total exports.[6] Russia, which is the world’s third-largest crude producer, has maintained output levels above 10.8 million barrels per day amid the 18-month price collapse.[7]

Given the current supply/demand imbalance in the global crude market, oil prices could decline further in 2016 before stabilizing much later. Saudi Arabia, the world’s top oil producer, certainly believes this to be the case. The Organization of the Petroleum Exporting Countries (OPEC) kingpin reportedly based its 2016 budget on an average crude price of $29 a barrel, according to Bloomberg News.[8]

The Russians are apparently more optimistic, having based their country’s 2016 budget on an average oil price of $50 a barrel.[9] Crude prices were trading around $37 a barrel by the end of 2015.

Ruble Volatility to Persist

Russia’s currency, the ruble, had an extremely volatile 2015, suffering its worst decline in 15 years. While ruble volatility is not terribly uncommon, its performance is closely linked to oil prices. Rebounding oil prices helped the Russian currency rebound after the 2008 collapse. In the absence of an oil rally (which isn’t expected any time soon), the ruble could face even bigger declines in 2016. While a weaker currency usually helps domestic exporters become more competitive, this is unlikely to apply in a country where oil and gas are the primary export.

A falling ruble also means that Russians may not be able to vacation in their favourite tourist resorts in Asia and Europe, leaving countries like Armenia and Georgia as more likely destinations.[10]

Political Concerns

Russia’s economic woes are complicated by a host of political factors, including Western sanctions, a growing military campaign in Syria targeting ISIS terrorists and severed ties with Turkey, which is supporting rebel groups in Syria. Russia’s involvement in Ukraine put it at odds with the United States and European Union, resulting in a tit-for-tat sanctions war. This was partly responsible for Russia’s sharp economic contraction in 2015. As a result, Moscow is ramping up efforts to diversify its economy, including shifting its economic relationships to the East.[11]

2016 is expected to be a decisive year in the Syrian crisis that has resulted in hundreds of thousands of deaths, millions of refugees and the empowerment of arguably the most dangerous sub-state terror group in the world. On December 18, 2015 the United Nations Security Council adopted a resolution that seeks to bring both sides of the Syrian conflict to the table in early January.[12]

Peace talks over Syria will have direct consequences for Russia, which has deployed approximately 4,000 personnel in and around Syrian territory, according to reports.[13] The crisis has not only created deeper divisions between Russia and the West, it has resulted in Moscow severing economic ties with Turkey over downing a Russian military jet in November.

The outcome of the 2016 US presidential elections could also set the tone for Russia-Western relations over the next four years. According to the latest primary polls, Hillary Clinton will represent the Democrats in November, while controversial business magnate Donald Trump will lead the Republican ballot.[14]

[1] Trading Economics. Russia GDP Annual Growth Rate.

[2] International Monetary Fund (October 2015). World Economic Outlook: Adjusting to Lower Commodity Prices.

[3] International Monetary Fund (October 2015). World Economic Outlook: Adjusting to Lower Commodity Prices.

[4] Tass Russian News Agency (October 2, 2015). “Russian GDP growth in 2016 projected at 0.7% – minister.” Tass Russian News Agency.

[5] RTE News (December 30, 2015). “Russian economy to endure difficult 2016, warns minister.” RTE.

[6] The Observatory of Economic Complexity. Country: Russia.

[7] Andrew Bergmann. World’s Top Oil Producers. CNN Money.

[8] Russia Today (December 29, 2015). “Saudis predict $29 oil prices in 2016 – report.” Russia Today.

[9] RTE News (December 30, 2015). “Russian economy to endure difficult 2016, warns minister.” RTE.

[10] Doug Stranglin (December 31, 2015). “Battered Russian ruble plunges amid oil price drops.” USA Today.

[11] Dan Steinback (August 24, 2015). “For Whom the Bell Tolls, Really The Impact of the Sanctions Against Russia.” Economic Monitor.

[12] Song Miou (January 1, 2016). “Global outlook: What to expect in 2016?” Xinhua.

[13] Maria Tsvetkova (November 8, 2015). “Russian soldiers geolocated by phones in multiple Syria locations, bloggers say.” Reuters.

[14] Real Clear Politics. Election 2016 Presidential Polls.

The post Russia’s Recession-Hit Economy to Struggle in 2016 appeared first on Forex.Info.

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